July 29, 2008

Cash-strapped families are buying cheaper frozen foods, rather than fresh products, as they attempt to cut their outgoings, Northern Foods, which supplies leading supermarkets, said yesterday.

Northern Foods said total sales from its frozen division had risen by 7.6 per cent over the three months to the end ofJune, compared with the same period last year.

The company, which depends on Marks & Spencer for about 25 per cent of its revenues, said supermarkets across the UK and continental Europe were seeing a similar trend, with many customers trying to cut food bills by buying frozen foods rather than chilled fresh groups.

Stefan Barden, the company's chief executive, said the trend reflected the mounting cost of food, where inflation reflects soaring global commodity prices. An economic slowdown could also lead to a fall in household incomes. People are also buying more frozen foods in place of going out to eat in restaurants, Northern Foods added.

"We have seen people beginning to change their shopping habits and we expect that to continue during the summer," said Mr Barden. "We are seeing people trade down from chilled to frozen pizza and people who aren't going to pizza restaurants so much are turning to ready meals."

Overall, Northern Foods' sales in its first quarter were up by 7.6 per cent, with the additional frozen food sales being balanced by lower revenues from products such as sandwiches, salads and ready meals.

The company warned it would have no choice but to pass on rises in the cost of basic ingredients to its customers, with commodity prices continuing to increase. While flour, wheat and dairy product prices have already risen sharply, Northern Foods expects the next round of price rises to come on meat.

"We are making sure we pass on the commodity [increases]," Mr Barden added. "I think all manufacturers have to pass on costs to consumers [via their retail customers] or they will all go bankrupt."

The company's first-quarter trading update suggests Northern Foods' customers have already seen the impact of these price rises, with the company's average selling price rising by 5.5 per cent over the three-month period. Such price increases are a major headache for supermarket groups, which are currently attempting to compete aggressively on price. Marks & Spencer, in particular, which last month reported a sharp slowdown in sales, can ill afford big price rises, though Northern Foods said no customer would be well-served by the failure of a key supplier.

Mr Barden also offered some comfort to customers, saying he believed the worse of the cost increases could be over. "There will be some inflation [this year] but clearly we are not going to see the same level of increases as last year," he said.

Northern Foods is also benefiting from the fact that many of its smaller rivals are struggling to compete in the current challenging market environment, with three pastry manufacturers having already gone bust this year. "We feel we are in a good condition and we think that the small players will continue to struggle or retire from the market," Mr Barden added.

In addition to supplying supermarkets with their own products, Northern Foods has also begun concentrating on the best-performing of its own branded goods. It said its Goodfella's frozen pizza range had successfully defended its market-leadership, and that the relaunch of its Fox's biscuits was showing "encouraging" early results.